Kristin Harad, center, a financial adviser, consults with Eric and Karen Gordon about their financial future as young parents, in San Francisco, March 7, 2013. Harad's firm focuses on new parents and the money-related tasks and decisions they have to make. .
Peter Dasilva, New York Times
For parents-to-be, a few financial and legal tips
- Article by: TARA SIEGEL BERNARD
- New York Times
- March 16, 2013 - 9:40 PM
Once you hold your baby for the first time, the last thing on your mind is all of the money-related decisions you have to make.
Dealing with them while you’re bleary-eyed is guaranteed to lead to less than optimal choices. As a new mother, I did my best to prepare ahead of time. What I did was create a series of to-do lists, one for before the baby arrived and one for after, which helped my family maintain some sense of order.
BEFORE THE BABY
Savings for leave: Figure out your company’s parental leave policy and how much time to take off and how you’ll pay for it. I started automatically shuttling money into subaccounts that I called “baby leave” and “day care.” To get a few months ahead of the game with day care, I set aside money for that big expense.
Buy life insurance: Term insurance, which pays a specific sum if you die within a certain term, is usually the cheapest. Several financial planners suggested that women apply for coverage before becoming pregnant, or at least early in pregnancy, to avoid potential issues later. How much insurance you need is a personal calculation. Buy the insurance outside of your employer so you can take it with you if you resign, the experts said.
Disability insurance: This pays a portion of your salary for a period if you become disabled, and doesn’t tend to rank high on the priority list, but financial planners suggest considering it.
Choose a health plan: Ideally, you want to think about this before you’re expecting so you can choose the plan with the best maternity coverage. Inquire about out-of-pocket costs. You generally have about 30 days to add the baby to the plan after the birth.
Suspend flexible spending: New mothers going on leave may need to turn off contributions to flexible spending accounts if there is no longer a paycheck to deduct from. The same goes for commuter cards. Once you’re back at work, you can flip the active switch back on, even outside the open enrollment period, because it’s a status change.
AFTER THE BIRTH
Emergency savings, 529s: You should have emergency cash for about six months of living expenses before thinking about a 529 college savings plan, several planners said. Still, you really can’t open one of these state-sponsored accounts soon enough. Its mere existence means you’ll be more likely to deposit found money like cash baby gifts or income tax refunds.
As long as you use the 529 money for higher education, you don’t have to pay tax on capital gains. Thirty-three states plus the District of Columbia offer income tax deductions on the 529 plan (if your plan is sponsored by the state or territory where you file a tax return), and withdrawals are tax-free. It’s best to open the account with the parent as the account owner and the child as a beneficiary, as soon as you get your baby’s Social Security number.
Taxes: Even babies born on the last day of the year provide their parents with a nice tax bonus: In 2013, a child will reduce your taxable income by $3,900. While that exemption is available to all taxpayers, you may need to choose one of two tax breaks if you plan on working and paying for child care. If your employer offers a flexible spending account for dependent care, you can set aside up to $5,000 to pay for day care or a nanny; it’s excluded from your income. The child-care credit, meanwhile, is a credit (meaning if you owe taxes, you will be credited dollar for dollar) for up to 35 percent of child care expenses up to $3,000 for one child, or $6,000 for two children. (The percentage drops to 20 percent from 35 percent as adjusted gross income rises to $43,000 from $15,000.)
Guardians: Picking a guardian to care for your child should something happen to you or your partner is the last thing you want to think about when welcoming a new baby, and that’s why many parents procrastinate in writing a will. “I have had clients come to me to have a will prepared after their child turns 18 because they could not decide on a guardian,” said Nancy Bender-Kelner, an estate planning attorney in Minnetonka and a mother of four.
Estate plan: Depending on whom you ask, you need to create either a will or a revocable trust to serve as the main document to execute both your and your spouse’s wishes in the event of your untimely deaths. Some experts suggest the path of least resistance. Just write a basic will, which should contain what’s known as a testamentary trust, or a trust created for the benefit of the child and that usually goes into effect only if both parents die, said Bender-Kelner. (The trust also can be used to pass family assets directly to a child.)
Having some sort of trust in place is important; if you don’t, and a minor child is named a contingent beneficiary on a retirement account, for instance, the financial institution will not pay the funds directly to the child, but instead will ask the courts to establish a conservatorship to oversee the child’s finances. (It also means the child would be able to receive all inherited money at age 18, which may not be desired.) That can be a long, burdensome process and is best avoided, experts said.
Creating a will is certainly the simpler and less expensive route. But some lawyers still call a revocable trust the gold standard. One of its main advantages is avoiding probate.
Remember date night: When the baby arrives, changing just about everything, it can be difficult to remember what it was like when it was just the two of you. So do what you can to stay connected and keep your partnership strong, particularly at what is the happiest and most stressful time of your lives. “Make at least a monthly date night a non-negotiable part of your spending plan,” said Kristin Harad, a financial planner in San Francisco whose firm, VitaVie Financial, focuses on new parents.
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